Raising the personal allowance: a Mephistophelean idea

Kristian Niemietz

13 April 2010

The Economist has repeatedlycriticised the Conservative Party’s proposal to permit married couples to pool their income tax allowances. The plan would benefit single-breadwinner families, who, under the present system, are effectively waiving the Personal Allowance of the non-working partner. The magazine deemed the proposal both paternalistic, for trying to “tempt couples down the aisle” and regressive: “most of the poorest families would not benefit. [...] of the 3.9m children living in poverty only 11% would stand to gain.”

The first criticism is fair. In a free society, government should have no role in promoting or discouraging particular family structures. (Through the “couple penalty” in the benefits system, it currently does the latter.) But this is not necessarily a reason to dismiss the plan. At least for some people, it amounts to a tax cut, and as the late Milton Friedman put it: “I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” Like Goethe’s Mephistopheles, the Tories want the right thing for the wrong reason.

In a more indirect way, this may also apply to the second point The Economist raises. Their 3.9m-figure refers to children living in households with an income below 60% of median household income. True, most of those falling below this poverty line do not pay income tax, and those who do are the ones not far below. But this does not mean that raising the Personal Allowance would only reach the not-so-poor among the “poor”.

As the Institute for Fiscal Studies shows, those with the lowest incomes are generally not the ones with the lowest living standards. Plotting income against Material Deprivation (MD), a consumption-based measure of poverty, they find a roughly arch-shaped relationship: starting in the middle of the income distribution and moving downwards, MD-poverty increases. But towards the very bottom, MD-poverty falls again. Very far below the poverty line, living standards are generally higher than in closer proximity to it, or just above. The reasons probably include short-term income fluctuations and misreporting.

Therefore, to those who could really do with a bit of extra income, raising the Personal Allowance might do more good than the Conservatives realise, and this is without even mentioning dynamic effects. The real criticism of the Tory tax plan should be: why so little, and why only for some?

Good post. There is a real problem in the tax and benefits system that benefits are determined according to household income and tax allowances are given to individuals. This leads to serious discrimination against couples who support each other. The Conservatives have stupidly (and I use that word carefully because I think they have been very stupid) not used this argument but, instead, argued in favour of specifically rewarding marriage and lost much respectable opinion in the process. Against The Economist one should also say that the Tory proposal benefits so few because the current system has eradicated families with two parents and one earner – that is why change is needed.

Submitted by Peter on Tue, 13/04/2010 - 11:09.

Isn’t there a danger of confusing ends and means here? Income and taxation are means to an end, whereas marriage, and all it entails, is an end in itself. The case is therefore really an economic one (if I’m allowed to say this on this here!).

Submitted by Giles on Tue, 13/04/2010 - 11:39.

Why so little and why only for some ….Oh, I wonder. It can’t be the £167bn deficit can it? No, silly me, because that can always be dealt with by cutting spending, just like Margaret Thatcher did. Except, of course, even she could not cut that much that fast. In response to Philip: why do you libertarians always imagine people are so entrapped by systems? People choose whether to be two parent with one earner. We are not all directed by the state, as you libertarians strangely believe we are. In many ways you lot are just like Marxists, utterly overstating the significance of the state. How many of you have made life choices in that way?

Well, I think the personal allowance should be raised to around £12k initially but, unlike the LibDems, I deplore envy politics and so would plump for a flat rate thereafter, something around what UKIP are aiming for, of 30%. The idea would be to initially make it roughly fiscally neutral on paper (we know that it might well increase revenue) and to raise VAT to 20%.With major cuts (as per previous article) the debt can then be tackled and the income tax rate lowered steadily.

Submitted by Philip on Tue, 13/04/2010 - 19:04.

Giles – the empirical evidence is very strong that tax and benefit systems do affect the decision whether to marry and do affect the extent of fraud. Just one of many examples is that people who are unaffected by the system because of their income overwhelmingly “couple” to have children (live together in stable relationships or marry) and those that are stuck in the benefits system are much less inclined to. To argue that people’s decisions are affected by economic incentives is not akin in any way to Marxism: the suggestion is ridiculous. Let us put it another way: why should the state systematically discriminate against people who form families and transfer income within them?

Submitted by Giles on Tue, 13/04/2010 - 20:36.

PhilipI think you have shown correlation, not causation, and most poverty-stricken people would feel rather annoyed to be told that their decisions to stay together for their kids or not are determined by the pounds they receive from the state and not their higher feelings, as it is for we richer sorts.People on benefits are poorer, probably worse educated, subject to many other pressures that no doubt increase the likelihood of them splitting up – regardless of what the benefit system *makes* them do. I don’t think you have established causality, and what a grim view of human nature it would be if you had. Sure, economic incentives play a part. Nothing like as large a one as implied

Submitted by Kris on Wed, 14/04/2010 - 10:29.

Giles,
suppose we had a council tax system in which the tax liability increased more than proportionally in the number of adults in a household, say it’s £T for a single HH, 2.2*£T for a two-adult HH, 3.6*£T for a three-adult HH and so on. Surely this would, over time, have some impact on the average household size, and we can say that without making any Matrix-style ‘the-system-controls-us’ assumptions.
Such a system would make the nation as a whole poorer than it would otherwise be, because the utilisation of within-household economies of scale would decline.

Submitted by Dave Atherton on Wed, 14/04/2010 - 10:35.

I am not generally in favour of the state meddling in the private lives of people and social engineering. However there is ample empirical evidence that stable and especially married couples tend to have children that are more successful, especially when it comes to education and criminality. As someone who lives in inner London I have seen what disfunctional families, many single parent types in particular, leaving children at a vast social disadvantage. We do not want finger wagging and laws to encourage relationship responsibility but a taxation nudge is to be welcomed.

Submitted by The people have the whiphand. But not in the way the Conserv on Wed, 14/04/2010 - 10:58.

[...] intrinsically unsatisfying. I sort of expect others to feel the same. Whether it comes from the right (see IEA comment thread) or left, I am repelled by the idea of being the toy of government [...]

Submitted by Philip on Wed, 14/04/2010 - 12:33.

Personally, Giles, I think it is a grim view of human nature to assume that people who are not well educated and poor split up. And now who is establishing correlation without causation? This did not used to be the case. I am afraid the evidence is quite strong – time series and internationally. It does not establish causation but it does point in the same direction: incentives matter enough at the margin to make a difference to those who are otherwise indifferent. I ask again – why do you want the state to systematically discriminate against poor couples with children (whether married or not) if they chose to redistribute income within the family. Beveridge will be turning in his grave.

[...] intrinsically unsatisfying. I sort of expect others to feel the same. Whether it comes from the right (see IEA comment thread) or left, I am repelled by the idea of being the toy of government [...]

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